Buying property outright with an SMSF

I INTEND to purchase an investment property through my SMSF (without borrowing). Do I need a financial advisor to draw up an investment plan to support this purchase?

Answer this week provided by Liam Shorte, a financial planner and SMSF specialist at NextGen Wealth Solutions.

A self-managed super fund (SMSF) allows you the ability to handle all the management and responsibility for the compliance of the fund or to outsource parts of the administration.

If you are going to buy an investment property and do not wish to use a financial advisor then you must make sure that you are following the rules and regulations as laid down by the SIS Act and regulations.

The first move is to check your trust deed and make sure it allows you to invest in direct property. Most trust deeds will but you need to check just in case.

Secondly, does the investment in a direct property fall within the parameters of the written SMSF investment strategy of the fund? The investment strategy is designed by you the trustees. If not, then you need to reformulate the strategy to allow for this investment and consider matters such as the following.

• Consider the risk of the investment and whether it is appropriate for the fund members.
• Look at the potential income and growth return on the investment and compare it with alternative options.
• Consider diversification and the risk of putting all your eggs in one basket.
• Liquidity and ability to meet member benefits. If you are investing the majority of the funds assets in one investment then you need to ensure funds are available to meet expenses such as accounting, audit and ASIC fees, rates and insurance should the property be untenanted for a long period.
• Also if there are two or more members in a fund, you may need to sell the property to fund a death or disability benefit and this may not always be an appropriate time to sell in the housing price cycle.
• Insurance of assets and life and TPD insurance on members becomes important to protect the asset and also to provide exit strategies should the funds be needed.
• Also consider the specific circumstances of all members such as stability of martial arrangements, approaching retirement and requiring a pension from the fund, or health problems that may involve accessing the fund early.

Then you need to make sure that investment does not breach any of the other rules. These include:

• Ensuring the property is not purchased from a related party even at market rates.
• Making sure the property is purchased in the correct name of the trustees of the fund
• Ensuring all funds for the purchase of the property come from the fund and not from the members’ personal bank accounts – even that 0.25% holding deposit!
• An SMSF is also prohibited under the “in-house asset rules” in superannuation law from leasing to or from related parties if the assets involved are worth more than 5% of the fund’s total market value. Business property – but not residential property – is among the few exceptions to the rule. So you cannot use the property as a holiday home.
• Be aware of what can and cannot be done to a property in a SMSF structure, especially around development and having work done on the property that may raise a charge over the property. Significant building works may involve a contract that gives the builder a charge over the property which is not allowed in an SMSF.
• Treat this investment like any other direct property investment by doing your research on the property and its potential, as well as pest and building inspections. Remember as trustee of the fund, you have trustee’s duties and obligations to meet and may be held accountable. Ensure you use a conveyancer or solicitor who has experience with buying property through trusts.

I do recommend you see your accountant before making a decision on buying the property outright. Your accountant will look at the cash flow and tax consequences for you and guide you in that area.

You should, I believe, seek advice from a financial planner who is an SMSF specialist advisor. Consider that even though you can buy the property outright, this may not be the best move for you, and using borrowing may allow you to add diversification to your strategy, improve your overall fund returns and decrease the risk involved. A financial planner can also guide you on the insurances you require and how to structure them properly in your fund.

In summary, yes you can purchase a property without a financial planner being involved but it may not be a wise decision as superannuation is a tax structure and a complicated system. Often someone who works this system day-to-day will be able to identify costs, traps and handy tips to make your strategy more successful. So maybe spend that little extra on a fee for service advice on this strategy as the long-term tax benefits may make using the superannuation structure pay off handsomely.

Where to find out more

For more from Liam Shorte, Financial Planner and SMSF Specialist Advisor visit www.nextgenwealth.com.au and www.smsfcoaching.com.au or follow him on Twitter @smsfcoach.